Ch 16 Study Guide

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CHAPTER REVIEW Kieso 13e

1. Chapter 16 examines the issues related to accounting for dilutive securities at date of issuance and at time of conversion. Also, the impact of the computation of earnings per share is presented. The significance attached to the earnings per share figure by stock-holders and potential investors has caused the accounting profession to direct a great deal of attention to the calculation and presentation of earnings per share.

Dilutive Securities

2. (S.O. 1) Dilutive securities are defined as securities that are not common stock in form but that enable their holders to obtain common stock upon exercise or conversion. The most notable examples include convertible bonds, convertible preferred stocks, warrants, and contingent shares.

Convertible Bonds

3. In the case of convertible bonds, the conversion feature allows the corporation an opportunity to obtain equity capital without giving up more ownership control than necessary. Also, the conversion feature entices the investor to accept a lower interest rate than he or she would normally accept on a straight debt issue. Accounting for convertible bonds on the date of issuance follows the procedures used to account for straight debt issues.

*Note: All asterisked (*) items relate to material contained in the Appendix to the chapter.

4. If bonds are converted into other securities, the issue price of the stock is based upon the book value of the bonds. No gain or loss is recorded as the issue price of the stock is recorded at the book value of the bonds. For example, assume that Irvine Corporation has convertible bonds with a book value of $3,200 ($3,000 plus $200 unamortized premium) convertible into 120 shares of common stock ($10 par value) with a current market value of $35 per share. The journal entry to be made is as follows:

Bonds Payable 3,000 Premium on Bonds Payable 200 Common Stock 1,200 Paid-in Capital in Excess of Par 2,000

5. When

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